Before the Tax Cuts and Jobs Act was passed, scholarship money used for non-qualified expenses such as room and board was subject to the “kiddie tax.” The funds would be taxed as unearned income and subject to the same tax rate as a child’s parents.

But under the new tax law passed last year, such scholarships are now taxed at the same rate as trusts and estates, which means a significantly higher tax burden, especially for lower income students.

The Tax Relief for Student Success Act would limit the tax liability of these students by treating the portion of scholarship aid devoted to non-tuition expenses as a form of earned income. The funds would then be taxed at the student’s individual income tax rate rather than the higher trusts and estates rate.

“There’s absolutely no reason college students should have to pay an exorbitant amount of taxes on their financial aid packages while multinational corporations and their CEOs receive massive windfalls,” Menendez said. “This sloppy mistake in the tax bill must be fixed immediately and I’m working with my colleagues to push through legislation that ensures college students are not unfairly hit with a huge tax bill.”

The law would be retroactive to Dec. 31, 2017, so students who got stuck with an unexpectedly large tax bill in 2018 could go back and amend their returns and get refunds for the extra tax that was paid.

It would have no impact on the tax treatment of scholarships used to pay for qualified expenses, such as tuition and mandatory fees, which were always free of tax.

Some 1.58 million undergraduate students were awarded $6.1 billion in scholarships, according to Mark Kantrowitz of SavingForCollege.com, who used data from the 2015-2016 Postsecondary Student Aid Study (NPSAS). The data also showed another $1.3 billion went to 189,500 graduate and professional school students.

The bill comes on the heels of one introduced earlier in the week by a bi-partisan group of senators. That bill addresses the same higher tax levied on survivor benefits received by the children of deceased military members as a result of the Tax Cuts and Jobs Act. That bill would also treat such benefits as earned income, so they would be subject to a child’s lower tax rate.

The House of Representatives also passed a bill addressing the issue on Thursday. The SECURE Act (Setting Every Community Up for Retirement Enhancement) focuses on retirement savings, but also would reverse the changes that caused scholarship recipients and military families to pay higher taxes.

To read more about how the current tax impacts scholarship recipients, click here.

Scholarship recipients and their families may also be able to take advantage of some credits and deductions. You can learn more about those here.